Confused

[angerona]

Mortgage quotes like these (These are from http://www.mortgage101.com/Articles/DailyRateSurvey.asp but I've seen similar ones elsewhere) make me feel that I know nothing about the way mortgage industry operates.

Comments

[mamaracha]

I'm guessing that in the long run the bank makes more money on a 30year fixed than on a 15year fixed, and if you keep the qualifying requirements the same, than it makes sense they'll charge higher rates for the 15year fixed. Aren't there also some sort of prepayment penalties, even though you'd think the bank will be happy to get their money back ASAP? I'm guessing it's the same logic.

[pro_sha]

In most of cases there is no pre-payment penalties. For the banks it is actually bad to have pre-payments. People usually pre-pay when rates get lower and they can re-finance their mortgages for a better rate so the new mortgage that the bank will issue will be with a lower rate, which is less profitable.

[mamaracha]

Right, the basic idea is that the longer you keep paying the bank, the more money they make on you :).

[pro_sha]

Well, it is complicated actually. How profitable a current mortgage mostly depends on what is going on in the market place right now, meaning what the yield curve looks like and what rate the mortgage was issued at.

[pro_sha]

I don't know why 15 year is higher than 30 year but the fixed is lower because of ARM because investors don't want to buy ARMs right now. From what I have heard is that the only mortgages that are getting sold on the market are the ones that are esentially backed up by the government, which means non-jumbo fixed loans. This is how I understand it.

[angerona]

ok, that sort of makes sense wrt ARMs (although 5/1 seems pretty safe to me), but still why is 15 higher than 30?

[spogreb]

same reason - it's easier to sell a 30-year-fixed mortgage - it's the most standard loan that the investor knows can be resold to Fannie Mae and Freddie Mac. A 15-year is slightly less standard - and people don't want to touch anything but plain vanilla (i.e., "conforming") right now.

[pro_sha]

I think you are right. Plus the Fed is intervening in the mortgage market. They might be concentrating on 30-year mortgages and not on 15-year mortgages since 30-year are more standard. This would also push rates down on 30-year.

[austinfan]

Now you'll see these types of distortions because banks have higher risks with loans other than 30-year fixed. Fannie/Freddie recently vowed to buy 30-year fixed loans from banks at lucrative rates (lucrative for banks) - that's why banks make it so that people have incentive to take 30-year fixed.

[angerona]

I see. So only 30yr ones, not 15yr fixed ones as well.

[meshko]

These rates look high (unless I missed something and they climbed in the last week). I know somebody who locked in at 5% (fixed, 30) and somebody who's locking at 4.75 (this one might be bs, I don't fully trust the source).

[angerona]

oh, sure, I know there are better rates about -- these are just averages, after all. Plus if you pay fees or points, you'd get much better rates, too. But the disparity between what I'd expect the relationship to be between 30yr and 15yr fixed rates is there in all the rates.

[avacon]

It may be due to the yield curve having an inversion between 20-30 years:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

I don't understand the economic details of things that well, but I believe some of this
may be due to speculation that the interest rate will probabilistically average
higher than now over 30 years, so there's a risk to the lender in locking in a 30-year
mortgage at this point. (IANAE)

[angerona]

I don't understand the economic details of things that well, but I believe some of this
may be due to speculation that the interest rate will probabilistically average
higher than now over 30 years, so there's a risk to the lender in locking in a 30-year
mortgage at this point

Yes, that would be the usual thinking, which is why ordinary 15yr mortgages would be lower rate than 30yr one (because there'd be less risk to the lender). But now it seems backwards, which led to my question. Judging from what others are saying here, it seems to do with the mortgage resale values.